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MEI earnings call for the period ending January 26, 2019.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Welcome to the Methode Electronics Fiscal Year 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. For this quarterly conference call, the Company has prepared a PowerPoint presentation entitled Fiscal 2019 Third Quarter Earnings, which can be found at methode.com in the Investor Relations section. (Operator Instructions) As a reminder, this conference is being recorded.

This conference call does contain forward-looking statements, which reflects management's expectations regarding future events and operating performance, and speak only as of the date hereof. These forward-looking statements are subject to a safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise.

Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that cause these actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our annual and quarterly reports. Such factors may include without limitation the following: dependence on a small number of large customers, including two large automotive customers depending on automotive, appliance, commercial vehicle, computer and communications industries; international trade disputes resulting in tariffs, investment and programs prior to the recognition of revenue; timing quality and cost of new program launches; changes in US trade policy; ability to withstand price pressure including pricing reductions; ability to successfully market and sell Dabir Surfaces; currency fluctuations; customary risks related to conducting global operations; recognition of goodwill impairment charges; dependence on the availability and price of raw materials; fluctuations in our gross margins; ability to withstand business interruptions, successfully benefit from acquisitions and divestitures; dependence on our supply chain; income tax fluctuations; ability to keep pace with rapid technological changes; breach of our information technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; success of Pacific Insight and Procoplast and our ability to implement any profit from new applications of the acquired technology; significant adjustments to expense based on the probability of meeting certain performance levels and our long-term incentive plan; and cost and expenses due to regulations regarding conflict materials.

Additionally, this conference call will present both GAAP and non-GAAP financial measures. A reconciliation of these measures is included in today's earnings release, which you can find on our Investor Relations website.

I would now like to turn the call over to Don Duda, President and CEO. Please go ahead, sir.

Donald W. Duda -- President & Chief Executive Officer

Thank you, Stacy, and good morning, everyone. Thank you for joining us today for our fiscal 2019 third quarter financial results conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I have comments, and afterwards we will take your questions.

To start, I will ask you to turn to Slide 4. The first nine months of fiscal 2019 have been challenging, due to the weak automotive market, exacerbated by Europe's implementation of WLTP or the Worldwide Harmonised Light Vehicle Test Procedure. While the near-term automotive market is projected to remain soft, the long-term fundamentals of our business remain intact, due mainly to the strong cash flow generating businesses we have been building and acquiring.

Our free cash flow generation allowed us to reduce debt by $55 million in the third quarter, and with a reasonable, responsible debt to trailing 12-month EBITDA ratio of 1.7 at the end of the third quarter, our balance sheet is also fiscally conservative. Additionally, free cash flow is anticipated to be $92 million for the fiscal year. This free cash flow will allow us to continue to invest in technologies, businesses and end markets such as magneto-elastic sensing, vertical integration of onboard vehicle cameras, Dabir surfaces and LED lighting technologies, which will provide Methode the ability to continue to grow and increase long-term value, despite the significant automotive headwinds.

It is also interesting to note that almost 80% of our fiscal 2018 revenues are attributable to businesses or companies we acquired. The acquisitions we have made over the past decade or so have not only facilitated our growth, but through our manufacturing powers and vertical integration strategy have generated significant cash flows. Moreover, our Industrial segment sales grew 84% year-over-year in the first nine months, due mainly to the addition of Grakon, which is anticipated to have strong results for the year because of higher revenue and margin improvement. Not only as Grakon opening up additional customers and additional end markets, it is reducing our concentration in automotive and expanding our product line offering, while leveraging our past technology investments. Grakon also increases the scale of some of our core vertically integrated manufacturing capabilities. From an operations perspective, there are several ongoing integration activities within Grakon, including the implementation of the Methode business planning system, Methode production system and quality management system.

As in every acquisition, there is a learning from both sides and best practices are being shared. One of the key initiatives at Grakon is the implementation of lean tools, which will ultimately drive improvements in efficiency and inventory reductions, leading to further margin and cash flow improvement. Along with operational improvements, our global purchasing teams have been working on consolidating our purchasing power.

Also, we now expect our tariff expense will be lower for the year than we originally projected, which assumes a 10% rate. This combined with the anticipated improved results at Grakon resulted in our increasing fiscal 2019 guidance for income from operations. Additionally, as I will discuss more in a few moments, we have made significant progress in both the number of Dabir Services sold, and the number of clinical evaluations completed.

Looking at the financials on Slide 5, consolidated sales improved 8.3% year-over-year in the third quarter, and 11.4% in the first nine months. In the third quarter, non-GAAP adjusted income from operations increased from $29.6 million last year to $32.4 million this year, and in the nine months from $91.5 million last year to $102.3 million this year. These figures exclude expenses for initiatives to reduce costs and improve profitability, acquisition-related costs, as well as long-term incentive plan accrual adjustments in the applicable periods. Non-GAAP adjusted EPS improved from $0.74 of third quarter last year to $0.83 this year, and the nine months from $2.07 last year to $2.34 this year. This excludes the items I just mentioned, as well as the impact of the US tax reform. Ron will discuss this tax impact in his comments.

Next, I will be referring to Slide 6, to look at the key drivers for our sales performance this year versus last year. Our acquisitions and new launches have added $150 million in revenues through the first nine months, more than offsetting the impact of reduced vehicle production volume and our customers. Besides the sharp drop in vehicle sales and production in Asia, our customers in North America were impacted by the shift away from passenger cars, while our customers in Europe were also impacted by lower market demand for diesels, as well as the WLTP. Additionally, pricing reductions and the adoption of the new accounting standard regarding revenue recognition, which affected the accounting of tooling sales in our European operations reduced overall automotive sales. Consolidated sales were also negatively impacted by the delayed start of a major appliance program, as well as reduced data program volumes in the Interface segment.

In the Automotive segment, pricing reductions on lead frames and touch screens negatively impacted both sales and margins in both periods. Margins were also affected negatively by sales mix, initiatives to reduce cost through profitability and tariff expense, partially offset by a favorable currency impact from the Mexican peso.

As I mentioned a moment ago, our Industrial segment sales grew year-over-year 84% in the first nine months and 136% in the third quarter. Industrial segment sales improved the nine months, due to the addition of Grakon, but also due to increase of Hetronic and Power Products sales. Year-over-year gross margins improved 840 basis points in the third quarter and 630 basis points in the nine months. Gross margins in the fiscal 2019 periods were negatively impacted by purchase accounting adjustments, attributable to the Grakon inventory and tariff expense.

Now let's move on with an update on Dabir on Slide 7. During the third quarter, we started to manage or completed nine clinical evaluations across United States. We also had the first clinical evaluation in the med-surg arena with 10 systems placed in an oncology unit, in line with our plan to expand in the acute care space beyond the surgical suite.

Finally, one of the key internal measures we judged to be as progressed on is the number of Surfaces sold, which has increased year-over-year nearly five-fold from 79 in the full-year of fiscal 2018 to 384 thus far in fiscal 2019. Excluding controller sales and leases, revenue was attributed to Surface alone has grown from 64,000 in fiscal 2018 to over 396,000 thus far this fiscal year. Our number of clinical evaluations has also grown from 18 in fiscal 2018 to 28 to-date in this fiscal year.

At this point I'll turn the call over to Ron who will provide more detail on the financial results and review guidance. Ron?

On a GAAP basis, third quarter net income increased $55 million to $30.7 million or $0.82 per share in fiscal '19, from a loss of $24.3 million or a loss of $0.65 per share in fiscal '18. For the nine months, GAAP net income increased $48.6 million to $69 million or $1.83 per share in fiscal '19 from $20.4 million or $0.54 per share in fiscal 2018. In both periods, GAAP net income benefited mainly from lower income tax expense, higher sales in the Industrial segment, and increased international government grants. This was partially offset mainly by reduced passenger car demand and production in both Europe and Asia, higher stock award amortization expense, increased acquisition related costs, increased intangible amortization expense related to the Grakon acquisition, higher net interest expense, initiatives taken to reduce costs and improve profitability and tariff expenses. Consolidated GAAP income from operations was $26 million in the fiscal '19 third quarter versus $35.6 million last year, and $73.8 million in the nine months of fiscal 2019, versus $90.7 million in the same period of last year. In both periods, income from operations was negatively impacted by reduced passenger car demand and production in both Europe and Asia, higher stock award amortization expense, increased acquisition related costs, increased intangible asset amortization expense related to the Grakon acquisition, initiatives to reduce costs and improve profitability, and tariff expense.

Moving to margins on Slide 8. Non-GAAP adjusted gross margins improved 70 basis points year-over-year in the nine-month period and exclude initiatives to reduce cost and improve profitability and purchase accounting adjustments related to the step up in inventory. Gross margins were negatively impacted by an unfavorable sales mix and customer pricing reductions in the Automotive segment, as well as significantly reduced sales in the Interface segment, partially offset by a favorable sales mix in the Industrial segment and a favorable currency impact.

Non-GAAP selling and administrative expenses as a percentage of sales decreased 30 basis points in the nine-month period, and exclude acquisition related costs, initiatives to reduce overall costs and improve operational profitability and the long-term incentive plan accrual adjustments in the applicable periods.

Shifting to EBITDA, the Company generated $109.1 million in the nine months of fiscal '19 or 14.9% of sales, versus a $113.3 million or 17.2% of the sales in the same period last year. However, adjusting for initiatives to reduce overall costs and improve operational profitability, acquisition related costs and long-term incentive plan accrual adjustments in the applicable periods, adjusted EBITDA improved year-over-year from $114.1 million or 17.3% of sales in the nine months last year to $137.6 million or 18.7% of sales in the nine months of fiscal 2019. For the full year of fiscal 2019 we expect EBITDA to between $155 million and $160 million or in the 15.5% to 16% of sales range. For the full year we anticipate adjusted EBITDA to be in the range of $180 million to $190 million or 18% to 19% sales range.

A few other financial items to review. Year-over-year intangible asset amortization expense in the third quarter of fiscal '19 increased $3.5 million or 175% to $5.5 million, primarily due to the amortization expense related to the Grakon acquisition, and increased $7.4 million or 200% to $11.1 million due to the Pacific Insight, Procoplast and Grakon acquisitions. The Company's effective tax rate was 6.1% through nine months or an expense of $4.5 million. For the third quarter, the Company reported an effective tax rate benefit of 10.4%. The lower tax rate was due to a few significant events that occurred during the third quarter. First, the Company finalized its provisional estimate for US tax reform and recorded a tax benefit of $4.8 million as allowed under accounting standards SAB 118. This adjustment was due to additional regulatory guidance which became final during calendar fourth quarter or our fiscal third quarter.

In addition, the Company's tax rate also benefited from other discrete items, which totaled $2.7 million in the quarter. These adjustments combined for a $7.5 million benefit during the quarter. The Company's effective tax rate, excluding the impact of these adjustments would have been 16.7% for the third quarter, and between 16% and 17% for the full year, which is consistent with our previous guidance. We estimate that our effective tax rate will normalize for the remainder of our fiscal 2019, and we expect the full-year effective tax rate to be in the 9% to 11% range. The Company continues to enjoy a favorable overall effective tax rate, which drives higher earnings and cash flow on a long-term basis. We will continue to pursue prudent and reasonable actions that will allow us to maintain this enviable rates.

In the first nine months of fiscal 2019, we invested $37 million in CapEx, mainly to support programs and launches in North America and Europe. We estimate our capital investment for fiscal 2019 to be in the $45 million to $47 million range. Expense for depreciation and amortization for the first nine months was $30.6 million. For fiscal 2019, we expect depreciation and amortization to be between $42 million and $44 million.

Let's move to Slide 9. Free cash flow through the first nine months was $62.6 million. We expect our fiscal 2019 free cash flow to be between $90 million and $95 million. Our debt to trailing 12-month EBITDA ratio, which is used for our bank covenants, is approximately 1.7. This ratio was lowered in 3Q due to our significant deleveraging during the quarter.

Moving to Slide 10, I'll finish up my remarks with guidance. As a reminder, the guidance ranges for fiscal 2019 are based upon management's expectations, regarding a variety of factors and involve a number of risks and uncertainties, which have been detailed in this morning's release, the 10-Q and the Form 10-K. We announced this morning we anticipate fiscal 2019 sales to be at the lower end of our previous guidance range of $1 billion to $1.04 billion. The Company has updated guidance for pre-tax income to a range of $104.5 million to $111.5 million, and earnings per share in the range of $2.50 to $2.67. These changes are from pre-tax income in the range of $91.5 million to $105.5 million, and earnings per share in the range of $2.02 to $2.33.

Looking at the midpoint of the pre-tax guidance range issued at the end of the second quarter, which would be $98.5 million, and adding to that the improved anticipated operational results like Grakon and lower than anticipated impact from tariffs on imported Chinese goods, the new midpoint of the pre-tax income guidance range is $108 million. From an EPS perspective, adding the transition tax due to US tax reform and the other discrete items that I just mentioned to the two quarter EPS guidance midpoint next to the current EPS guidance midpoint.

In conclusion, please move to Slide 11 to look at our key drivers for our anticipated EBITDA performance this fiscal year versus next as we get closer to the performance measurement period at the end of our fiscal 2020. Looking at EBITDA based on the midpoint of our fiscal 2019 guidance range issued today, which would be $159 million, and adding the EBITDA from new automotive and laundry program launches of approximately $20 million, adding EBITDA from a full-year of Grakon, which is estimated to be an additional $24 million, subtracting the impact of the loss of EBITDA from reduced passenger car production, which we estimate to be about $19 million, adding the benefit of initiatives to reduce costs and improved profitability of about $10 million, and adding the one-time costs we incurred in fiscal 2019 for acquisitions and restructuring of about $27 million, brings you to the target level of Methode's long-term incentive plan, which is $221 million of EBITDA. For the accounting regulations of ASC 718, management must attach quarterly to the probability of meeting the 2020 EBITDA projections with a 70% confidence level, as noted in footnote (7) in the 10-Q.

Don, that concludes my comments.

Donald W. Duda -- President & Chief Executive Officer

Ron, thank you very much. Stacy, we are ready to take questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Chris Van Horn with B. Riley. Please go ahead.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Good morning. Thank you for taking my call.

Donald W. Duda -- President & Chief Executive Officer

Good morning, Chris.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

I was hoping that you could give us a little more detail on the guidance, what you're kind of thinking about for -- maybe if even on some of your end market level using IHS as a baseline for auto and kind of adding in what you see from a program launch perspective. And then just kind of some commentary in your other markets, if you don't mind. Thanks.

Donald W. Duda -- President & Chief Executive Officer

Okay. From an auto standpoint, we of course use our releases from the automakers, and our discussions with the automakers overlaid with some IHS, L&T, and we do sometimes double check with IHS. So that's -- those are the main drivers of auto. Grakon were still familiarizing yourself with it, but there we use ACT and also the releases that Grakon see. So all that put together is driving of automotive and transportation, and then the smaller businesses, it's customer discussions and releases.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Okay, got it. And then, you know, the Grakon acquisition I think a big part of it from our viewpoint was the heavy-duty trucking customer was going to be a big -- a bigger end market for you all. Could you comment on the pipeline that you're seeing with -- now that you have Grakon and maybe some other Methode technologies that you can add into that. What you're hearing from the customers and any sort of commentary in the pipeline over the next couple of years?

Donald W. Duda -- President & Chief Executive Officer

Sure. I want to be -- first of all, I want to speak for our customers. But our backlog remains strong. We anticipate that we will remain strong for the duration of this calendar year. I think that's in line with what ACT has said. We'll see what calendar year '20 brings. From our standpoint, we continue to take cost out of Grakon, and we're actively managing the factory. Our VP in Asia has controlled the factory and that will take costs out there, which will help us -- not this year, but it will help us next year. And then we're going to continue to talk to the customers about what other areas that our products that we can provide, and then very important, and I think I said in the script is our global procurement. We've already seen reductions in our LED by -- for global Methode, including Grakon by a negotiation. So there's a number of things that we're doing as we look into calendar year claim to and improved Grakon's performance, and that potentially might offset any downturn we will see in the business.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Okay, got it. And then when we look at the capital deployment, I know you've made a number of successful acquisitions and I imagine there's probably not anything in the near term, but as we think further out, is there any sort of areas, regions or end markets that you identified that might be interesting for you from that perspective? And then as you look at the portfolio, how are you thinking about the companies that you're holding now?

Donald W. Duda -- President & Chief Executive Officer

Well, let me the answer that first. We continue to evaluate what our portfolio is and what the -- where does that fit with the Methode. And then if something doesn't, we would take action there. But there is nothing eminent in that respect.

In terms of future acquisitions, we are focusing on industrial. I won't roll out automotive, but that space we know how to operate in, we've got technology that we can bring it, we certainly know how to manufacture the product, so that's a focus for us. Medical, I think we'll focus on Dabir and unless there is some of this great acquisition and that gives Dabir a very strong path to market. I think for the most part, focused on our industrial and build that up -- in line with, I guess our technologies and what we're comfortable with. We wouldn't do an industrial acquisition that we didn't understand and that would take us too far afield from what we know.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Okay.

Donald W. Duda -- President & Chief Executive Officer

And then...

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Go ahead.

Donald W. Duda -- President & Chief Executive Officer

The other thing we would add is that, we've done well in sensors, our magneto-elastic sensors have dome well, our eddy-current sensors do well. So the sensor acquisition which would actually help all of Methode is also something we'd be looking at.

Christopher Van Horn -- B. Riley FBR, Inc. -- Analyst

Okay. Thank you so much for the commentary. I'll hop back in queue.

Operator

Our next question comes from David Leiker with Baird. Please go ahead.

Erin Welcenbach -- Robert W. Baird -- Analyst

Hi, this is Erin Welcenbach on for David.

Donald W. Duda -- President & Chief Executive Officer

Hello, Erin.

Erin Welcenbach -- Robert W. Baird -- Analyst

Good morning. My first question is again a follow-up on the Grakon acquisitions. I'm wondering if you can frame for us how much of the upside in the quarter was from better fundamental business performance, maybe given some of the stronger commercial vehicle end markets versus synergies either cost or kind of cross-selling synergies tracking above your expectations.

Donald W. Duda -- President & Chief Executive Officer

Well, as I think both Ron and I said, tariffs came in better than we anticipated. I think the team has done a very good job of moving us quickly as they could to mitigate a certain portion of them, and that was really us. Grakon brought all product into Seattle, and then they would ship to Mexico or ship to Canada, and of course United States as well. Our teams are successful and quickly changing the ship point, which reduce the tariffs. So that helped. And Grakon did in the quarter -- the sales were higher than forecast in Q3, so that's the -- advantage of the Class 8. And then, well, it's in our automotive (Technical Difficulty) Tesla also had an impact.

I'll add to that, maybe we were able to very quickly gain some procurement. Synergies that definitely drop to the bottom line in 3Q and going out in the 4Q and then into '20 -- fiscal 2020 as well.

Erin Welcenbach -- Robert W. Baird -- Analyst

Okay, that's helpful. Thank you. And then on the cost actions you announced, I believe it was last quarter. Where do you stand in those in terms of when we'll start seeing the benefits of those flow through the P&L and more substantially.

Donald W. Duda -- President & Chief Executive Officer

We'll see some benefit in our Q4, we will see the full benefit in our fiscal 2020.

Couple of questions from me. I guess I'll start briefly on Dabir. Looks like it's at long last starting to get some traction after a lot of testing and probably a little bit slower out of the gate. But how do you think about sort of deployment from here? It seems like it's checked all the boxes in terms of efficacy and safety and so on and so forth. And what sort of the ramp to this becoming sort of the product that you envision several years ago?

Donald W. Duda -- President & Chief Executive Officer

Good question. The next step is to expand from single point hospitals into hospital systems, and we're starting to see some of that now again slower than we would like, but it is moving in that direction. And your first half of demonstrate efficacy at the operating level, with the nurses to get credibility and then you can talk to the C-suite in the systems, and that's where we're at now with the teams are -- I think doing a very good job now of expanding Dabir in particular hospitals are at now and then going forward. And I judge that by, as I said the number of surfaces that we're selling and the number of clinicals that are going on. You have to do that first before you can talk about any sales. We still maintain that the hospital surgical suites are the area we want to focus on although we have, as I said in my prepared remarks, in the other areas, and that remains a very large and robust market for us.

Now in terms of when we see that, we'll make progress next year. We're not planning on Dabir turning the corner next year from a profitability. We think that's more of a 21 event, and I realize that we've been talking about it a long time, but I have to say from my standpoint, I feel reinvigorated with the progress in Dabir that's been made. So I still think we have sometime, it's not going to swing Q4, but I think we're in the right direction. And I agree it's taken a long time, but I think we're getting there.

Steve Dyer -- Craig Hallum Capital Group -- Analyst

And that's very helpful. I guess just following up on that. At one point, I think we all had expected that was going to be a very major product for the Company in the future. Have you assumed anything in the last year or two or three that has sort of changed your mind on that in terms of the TAM that it could be for you guys?

Donald W. Duda -- President & Chief Executive Officer

No, I actually I would go the other way that the market is larger than we thought it was, that we still have to land some systems and get it to be a standard of care, but once it becomes a standard of care, that market, the total billed market is quite large. And I have said a number of times, we are focusing on the surgical suites, because it's essentially no competition, but the bigger market is when you get outside of the surgical area into acute -- excuse me non-acute, we did a study on a respiratory patients -- ventilator that turn out very favorable. I think we commented on the last call. So no ways it formed Dabir, we think the market has diminished at all, I think it's grown.

Steve Dyer -- Craig Hallum Capital Group -- Analyst

Got it. Thank you for that. And then I guess just jumping over to auto, your largest auto program is I think in the middle of a change over model years (Technical Difficulty) to the T1. Just kind of given the disruption I guess that you're seeing here at fiscal '20 around that changeover, would you expect that the absolute dollars from that program can kind of grow in fiscal 2020? Is that part of the assumption?

Donald W. Duda -- President & Chief Executive Officer

You would have to tell me what's the expected (inaudible) is going to be, and where GM forecast their year we're obviously going to be dependent upon that. In our planning, l think we're holding our own, but we're not expecting a huge upside from that. I don't think there's anything in the marketplace that would suggest that.

Well, the reason I say that as I thank you on most of fiscal '19 or at least half of it is going to be sort of not at full production for the K2, just given that changeover, so I guess the assumption would be is most of fiscal 2020 should be back sort of full production for the T1 both trucks and SUVs.

Donald W. Duda -- President & Chief Executive Officer

Let me answer this way. From our -- just looking at L&T, looking at IHS, that's really what we do our planning on, and we're not seeing that. Now that doesn't mean that three months from now that doesn't change. I mean, I really feel that we have a three to six months window where we can have some degree of certainty going to get a pay -- past that is it. I think it becomes difficult to forecast.

Steve Dyer -- Craig Hallum Capital Group -- Analyst

Okay, fair enough. And let me just, can you just remind us around content on the T1 versus K2 kind of apples to apples per vehicle?

Donald W. Duda -- President & Chief Executive Officer

It's just directionally if nothing else, similar more or less, et cetera.

And it would be less and the end result prices has reduced us, because the screens are down, the screens are directed by. So they have the sell prices has dropped and in general, they have sell price of center consoles has reduced from when we originally launched K2, that directionally the content. The content dropped, the values are dropped, and we've talked in past calls about the dramatic reduction in screen prices.

Steve Dyer -- Craig Hallum Capital Group -- Analyst

But that's largely pass-through revenue, as I recall, right. I guess I'll just jump.

But it is pass through -- it's the pass through revenue, but it's in the price.

Steve Dyer -- Craig Hallum Capital Group -- Analyst

Yes. Okay, fair enough. Last question from me, and then I'll jump back in line. On the walk from EBITDA from fiscal '19 to fiscal '20, it's great, very helpful. Thank you. It looks like you increased sort of your expectation of cost initiatives and so forth, or I'm sorry that the additional Grakon revenue and contribution there by about $7 million, but you kept sort of your overall 2020 target at $221 million. Should -- is that just conservatism on your part that that can now be upside or have you seen something sort of compression in other parts of your business?

Donald W. Duda -- President & Chief Executive Officer

We've seen European auto drop, what do we have in the chart, $19 million into the passenger car reductions. That's significant. And, we may have more headwinds and tailwinds from that standpoint. So will Europe stabilize or will Europe drop. So are we being conservative? I guess we are being impractical and there can always be some upside, but there's going to be downside as well. And when we do these numbers, we have to certify that the auditors that were 70% confident in our forecast and we are still -- when do we give that 4-months from now or we have to wait -- we have ways to go on or given any comment on here?

So I might say that, Steve is that, you know, the plan is in the Q and all the filings $221 million is the target and that's where we're at and we can't really say much more about that otherwise we really be giving fiscal '20 guidance as well. So the plan is -- that's the plan.

I just wanted to ask you've done an excellent job in managing your margins, both in the current period and through your planning period. What do you see in the medium term as tailwinds to your margin, whether it be cost improvements or the mix of business that you anticipate to be growing when we head beyond the 2020 period?

Donald W. Duda -- President & Chief Executive Officer

Sure. The two big drivers for us are new programs, using our technology and higher margins. And I've pointed in the past to our magneto-elastic margins, in general, our sensing business. We put a slide out, I think, in the Needham conference, where we had -- I guess, last quarter, we had -- what was about $80 million of book business through '22 and that's a very, very good margin. And actually, we anticipate probably by '22 it will be $100 million. That the product carries one of our highest margins in the company.

So new business at higher margins or higher profit drive our overall margins. And also, we can generally take costs out of the product. It's harder in auto today because we're fighting reduced volumes and reduced overhead coverage. Our North American business was down $23 million year-over-year. But from a gross margin dollars, the team's kept it flat. And that's not easy to do in the auto business when there's a downturn. They have done a good job. Europe has struggled a little bit more, some of it's because their margins are higher than in the US.

But in general, if I look at Grakon, we've got great opportunity and we've built into our plans to take costs out there. They run a good factory, but it's not up to the Methode standards to our production system. We've got a good team. We will get them there, and we'll see the benefit of that some in '20, but also in '21. So it's a combination of new business and higher margins and then what we do well is take costs out of the product.

Christopher Hillary -- Roubaix Capital -- Analyst

Great. Thank you very much gentlemen.

Donald W. Duda -- President & Chief Executive Officer

You are welcome.

Operator

Thank you. I would like to turn the call over to Don for closing comments.

Donald W. Duda -- President & Chief Executive Officer

Stacy, thank you very much, and we thank everybody for listening and their questions. Have a good day.

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